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Japan Plans LNG Futures Contract

Japan is planning to start the world's first futures contract for liquefied natural gas, marking the latest step toward creating a global market for the fuel.

The market for LNG—the chilled and exportable form of natural gas—is poised to expand rapidly in the coming years, analysts say, as the U.S. increases its exports of the fuel and global demand rises.

Japan has been buying more LNG since the March 2011 Fukushima nuclear disaster. Above, a Tokyo Electric Power facility east of Tokyo.
Reuters

The price of gas varies widely across regions. Japan, the world's biggest importer of LNG, pays about $18 per million British thermal units, versus $4 for the product in gaseous form in the U.S.

Japan's LNG imports rose after the March 2011 Fukushima disaster sidelined most of the country's nuclear reactors.

The cost of those imports is linked to crude oil, reflecting historic ties between prices in the two energy markets. But many users say U.S. production unleashed by the shale boom has weakened the connection between LNG and the oil market. A futures contract would allow LNG producers and consumers to determine gas prices independently from oil, and provide a way to protect themselves against price swings.

Unlike the price of oil, which is set globally, the price of natural gas varies because consumers tend to buy from suppliers within their own region.

In the U.S., abundant supplies have caused gas prices to plunge from as high as $15 per million Btus in 2005. Japan pays a premium because it has little domestic output and transporting LNG is expensive.

"Japan definitely has an interest in something more in line with a global price of LNG, to offset their price with regions that have weaker demand," said Eric Bickel, commodity analyst with
Schneider Electric,
an energy-consulting firm. "They're sort of spreading that load."

The parties behind the push for the new contract—which include electricity and gas utilities, trading houses, traders and government officials—will aim to list the dollar-denominated futures on the Tokyo Commodity Exchange by March 2015.

Details of the contract still have to be worked out, said Takashi Ishizaki, who oversees futures-trading regulations in Japan as the commerce director for the Ministry of Economy, Trade and Industry.

LNG prices could fall if U.S. exports rise, analysts say. The U.S. Department of Energy is reviewing more than a dozen applications for LNG export terminals and may begin to make decisions in the near future.

However, U.S. manufacturers, utilities and other companies that benefit from inexpensive domestic natural gas have spoken out against exports, because they fear prices will rise as the supply is spread more widely.